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Puerto Rico Tries to Save PREPA Once More

After the Federal Judge Besosa held that “[t]he Commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the Recovery Act,” one would think it was over except for the appeals. One would be wrong, however. As was to be expected, PR Justice Secretary César Miranda announced on February 9, that he would appeal the decision. Less expected were the last words of his press release:

Finally, the Secretary declared that he believes that there is no legal impediment to having Puerto Rico implement the processes established by Law No. 71. Therefore, he will take into consideration the legal remedies available so that the statute remains in force. (Underlining and translation ours)

What does this cryptic sentence mean? What are the legal remedies available to the statute remain in force? On Monday, February 9, 2015, PC 2321 was presented by PR House Speaker Jaime Perelló and several legislators of the governing party. On pages 3-5 of the bill, it allows the Governor or the agency he designates, to impose on any property upon which a person has an interest in real property (this includes property, leases, usufructs, and many others) a declaration of public utility (“utilidad pública”). Upon this declaration, which has to be made after a public or judicial hearing, the property can only be used for that specified public use. In other words, if PREPA bondholders request a receiver as it is their right based on the Bondholders agreement of 1974, this law would not allow the operation of the utility for the benefit of the bondholders and hence would limit their property rights.

This would be nothing else but a boldfaced way of running around the consequences of Judge Besosa’s decision prior to the appeal. Once more this administration, instead of working with its creditors in an orderly fashion, has resorted fighting them in every front. Fortunately, I doubt the measure, even if approved, would pass constitutional muster.

PC 2321 is a bill of attainder, i.e., a law tailor made to punish bondholders, prohibited by both the PR and Federal Constitutions if they exercise their rights under the 1974 agreement, see, Nixon v. Administrator of General Services, 433 U.S. 425 (1977) and Colegio de Abogados v. ELA, 181 D.P.R. 135 (2011). Also, as Judge Besosa intimated, the removal of the right to appoint a receiver could be a taking without just compensation, which is exactly what this law seeks, see pages 65-74 of Judge Besosa’s decision. In addition, PC 2321 could be construed as an impairment of contractual obligations, another claim that survived the Government’s motion to dismiss. See, pages 46-65 of Judge Besosa’s decision.

Once more I encourage the Government of Puerto Rico to deal with its creditors, including PREPA bondholders and Doral, in a responsible fashion. Moodys reports that it still believes PREPA will default in its bonds and this would be disastrous for the island’s battered credit. Even if Chapter 9 of the Federal Bankruptcy Code does not apply to PR, the island could take heed of 11 U.S.C. § 109(c) of negotiating with creditors to obtain their agreement to a restructure, specially since there are efforts by the island’s Resident Commissioner to allow its public corporations and municipalities to use the federal law. Either pursuant to federal bankruptcy law or in a Greek style restructure, the Government must understand that it must reduce its size dramatically. Moreover, If PR insists on clashing with its creditors instead of cooperating with them, the island’s future will be grim.